Multinationals’ cash abroad slices tax load

Procter & Gamble, the Cincinnati-based company behind Pampers diapers and Tide detergent, reported a federal tax burden in 1969 that was 40 percent of its total profits - a typical rate for that era.

More than four decades later, P&G is a very different company, with operations that span the globe. It also reports paying a very different portion of its profits in federal taxes: 15 percent.

The world’s biggest maker of consumer products isn’t the only one. Most of the 30 companies listed on the country’s most famous stock index, the Dow Jones industrial average, have seena much smaller percentage of their profits go to U.S. coffers over time, even as their share prices have driven the Dow to an all-time high.

A Washington Post analysis found that in the late 1960s and early 1970s, companies in the current Dow 30 routinely cited U.S. federal tax expenses that amounted to 25 to 50 percent of their worldwideprofits. Now, most are reporting less than half that share.

The reason is not simply a few friendly provisions tucked deep in the tax code. It’s the result of the slow but steady transformation of the American multinational after years of globalization. Companies now have an unprecedented ability to move their capital around the world,and the corporate tax code has not kept pace with the change.

Just the opposite, in fact. Experts say the U.S. code has encouraged companies to shift their income overseas where it is more lightly taxed. Many firms, in turn, have discovered that just as they can move their manufacturing to other parts of the world, so,too, can they shift their income to far-flung tax havens such as the Cayman Islands.

The result is lower U.S. tax revenue that could pay for infrastructure, education and other services that support domestic growth.

Robert Willens, a corporate tax expert for more than 40 years, said he has noticedan unprecedented level of enthusiasm for reducing taxes.

“Maybe it’s just the pressure to produce profits,” Willens said. “I think people realize now that it’s not difficult to avoid U.S. taxes … and investors are demanding consistently improving performance.”

As momentum builds for President Barack Obama and Congress to overhaul the corporate tax code, this steep decline in tax expenses as a share of profits is a critical factor in the debate. And increased globalization has made the task of fixing the tax code much more difficult than the country’s last overhaul in 1986.

“The U.S. system for taxing its corporate citizens on their global income … is an outdated remnant that inhibits our ability to compete globally,” said Gregory J. Hayes, chief financial officer of United Technologies, in testimony before the House Ways and Means Committee in May 2011. “It was designed when the U.S. was the dominant economy and before globalization became an unmistakable market reality.”

Company executives have complained for years that their firms face the highest tax burden in the world, citing the United States’ 35 percent top corporate tax rate as the highest among developed economies.

P&G chief executive Bob McDonald was among 20 business executives - including other leaders of Dow 30 companies such as General Electric’s Jeffrey Immelt and Wal-Mart’s Michael Duke - who met with Obama in November to discuss the country’s fiscal issues, including the tax code.

The country needs to “make our tax system more competitive and … reduce the corporate tax rate,” said a statement from P&G ahead of the meeting.

Many companies argue that fixing the tax code would help improve economic growth, but that calculus has become more complicated as the interests of U.S. multinationals appear less neatly tethered to the interests of this country. This phenomenon has become especially clear during the economic recovery, with firms booking record profits while many American families still struggle with the wreckage from the steep recession.

“When you get U.S. businesses coming to Washington and talking about, ‘We need to do this and that for the U.S. economy,’ what does that even mean?” said Doug Shackelford, a professor of taxes at the University of North Carolina’s Kenan-Flagler Business School. “Who are they referring to?Is it U.S. workers? Is it U.S. shareholders?”

At first blush, the decline in corporate taxation could be a result of simple math. The top U.S. corporate tax rate - that 35 percent that companies complain about - is actually down from 48 percent in 1971.

But that’s only part of the story.

A major factor is that profits earned abroad, which in theory are subject to the same U.S. tax rate, often are taxed much more lightly, and companies are earning more overseas than ever.

Of the 25 companies in the Dow 30 that break down their pretax income between domestic and foreign sources, 14 earned more money overseas than they did in the United States in the most recent annual filings available.

Any dollar earned abroad does not get taxed by the U.S. government until it flows back to the parent company. A JP Morgan Chase report estimates that there is $1.7 trillion of foreign earnings being held untaxed overseas by more than 1,000 U.S. firms.

Companies have also found ways to shift their income across national boundaries, roving from country to country in search of the lowest tax burden. Ed Kleinbard, a tax professor at the University of Southern California, has dubbed these moveable earnings “stateless income.”

According to a Congressional Research Service report from this past January, U.S. multinationals in 2008 reported 43 percent of their overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands and Switzerland, all places famous for having among the lowest tax rates in the world.

However, in the corporate tax debate, it is nearly impossible to figure out what amount companies actually pay in federal taxes. Nowhere is there a straightforward number showing how much a firm pays to the U.S. Treasury every year.

Instead, firms list a “current tax provision” number that is an accountant’s estimate used to calculate earnings but that is not meant to equal the size of the company’s federal tax bill.

After doing its analysis, the Washington Post contacted every company in the Dow 30 and asked to see the actual figures paid to the federal government every year. No company provided the information.

And while many companies hold their money overseas, a number of executives have said that they would be willing to bring some of that money back to this country if the U.S. tax rate were not so high.

U.S. Rep. Dave Camp, RMich., chairman of the House Ways and Means Committee, has said he is interested inlowering the top corporate rate to 25 percent. He also favors exempting 95 percent of overseas earnings from U.S. taxation when that income is brought back to the United States.

It is not just the United States trying to figure out how to tax multinationals. Worldwide there is an increasing tension between businesses that have gone more global and national governments that still have to find a way to raise revenue to pay for domestic services.

The problem has gotten worse as countries adopt tax policies designed to attract more jobs and investment, only to wake up and discover that the firms doing business in their borders have found ways to pay near-zero tax bills.

“From a company’s perspective, they’re just minimizing their global taxes,” said Shackelford, the North Carolina professor. “They don’t care if that tax dollar goes through Berlin or London or the U.S. or wherever.”

Overseas tax issues have revolutionized company tax planning, especially for businesses that rely on intellectual property.

The Senate Permanent Subcommittee on Investigations found that from 2009 to 2011, Microsoft, a member of the Dow 30, was able to shift offshore almost half its net revenue from U.S. retail sales, or roughly $21 billion,by transferring intellectualproperty rights to a Puerto Rican subsidiary. As a result, the subcommittee found that Microsoft saved up to $4.5 billion in taxes on products sold in this country.

William J. Sample, Microsoft’s corporate vice president of worldwide tax, said in response that the company complies with tax rules in all the places it operates, paying billions each year in total taxes.

In 2012, Microsoft reported a tax expense that was the lowest-ever percentage of its total income, according to available data. The figure was 10 percent in 2012, compared with 33 percent in 1987, the oldest year for which information is available.

And it’s not just tech firms enjoying lower rates.

McDonald’s, the world’s biggest restaurant chain, reported a U.S. federal tax expense in 1973 that was more than 37 percent of its total profit that year, compared with 14 percent in 2012. The maker of Otis elevators and Black Hawk helicopters, United Technologies, reported an expense in 1969 that was 47 percent of profits. Now, it is 5.8 percent.

By contrast, energy firms such as Exxon Mobil and Chevron have seen their numbers stay flat and low over the years, often less than 10 percent of total profits.

Business, Pages 67 on 03/31/2013

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